From
Your Perspective:
Small business retirement plans
Solo 401(k)s
The
solo 401(k)
is designed for sole proprietors or self-employed people. It offers
the investment flexibility and high contribution levels of a
traditional
401(k)
plan, with a lower level of administrative requirements and at a lower
cost. If the only participants in the plan will be you and possibly
your spouse or a partner, the solo 401(k) might work well for you.
As
with an ordinary 401(k), you can defer salary to the plan. In 2008 you can defer 100% of your salary or 100% of your salary or net adjusted business profits (depending on whether the business is incorporated or not) up to a maximum of $15,500. You can contribute up to $20,500 if you are 50 or older. In addition, your
company, as your employer, can add on a tax-deductible contribution of up to
25% of your compensation if the business is incorporated, and up to 20% if it’s
not. The maximum total contribution is up to $46,000 in 2008, or $51,000 if you are 50 or older. That's more than you can put into any other defined contribution plan.
Additional benefits include the ability to take loans against your account assets and to
roll over
your other retirement assets into the account, should you want to
simplify your planning by consolidating your assets and your plan is
set up to accept these contributions.
The solo 401(k) is also known as the individual
401(k), and some companies who offer them use more casual terms: indy-k
and uni-k, for example. Because it’s a fairly new option, plans may not
be available from all providers and start-up prices may be higher than
for a
SEP IRA.
You’re a sole proprietor when
you own a business that isn’t incorporated. It’s the simplest
way to organize a company and gives you complete control
of the company’s assets, but
also means that you’re personally responsible for all of its
liabilities, including taxes.
Incorporated
companies, including those with just one employee, have separate tax identities.
